The Secret is Out: Equipment Finance Goes Mainstream in the Secondary Market
by Chad Hutchinson March/April 2019
Despite historically operating as a niche industry, equipment finance has seen an explosion of interest from banks and other financial institutions over the last few years. Chad Hutchison speaks on this phenomenon and the ways technology can give a leg up to new players trying to break into the market.
For the last half century, the equipment finance industry has continued to grow year over year. Starting at $29 billion in 1960, the industry has grown to over a trillion dollars in 2018. Industry veterans still remember a time when there were few lenders in the market and little to no competition.
In recent years, we have seen an uptick in independent lessors that understand the weaknesses of the industry and have created platforms to provide faster funding and an improved borrower experience, with company veterans viewing these new models as a natural evolution of the business.
However, what happens when those outside the industry start to understand this prized secret and want to enter the market?
Equipment leasing and finance has proven to be one of the best post-recession investments for banks, leading to banks, credit unions and fintech companies all chomping at the bit to get a piece of the market. But because the equipment finance industry has been controlled for so long by a small group of banks, independent lessors and captives, newcomers to the industry must cross a high barrier of entry in order to participate.
Most every bank has home loans and small business lending products. Though some offer loans to finance equipment, these offerings are usually not structured similarly or with the same turnaround times we see within our industry. Yet an examination of community banking data from 1992 to 2012 reveals that community banks involved in equipment lease financing performed better than the community banks that were not involved.
Fifty years ago, there were only 10 or so banks that competed in the space. Nowadays, that number has grown to 200+ banks, along with hundreds of independent lessors and brokers. With a strong and robust secondary market, these lenders can approve virtually all their applications knowing there is a home for the transaction. Through new technologies keeping track of buyer and seller profiles and AI suggesting the best fit for a transaction, this makes originating new leases that much easier.
A healthy secondary market will also lead to more entrants into originations. Right now, it remains a sellers’ market, with more buyers than ever wanting a piece of the action, reversing a trend seen during the Great Recession in 2008-2009 when buyers were fleeing.
With rising rates, syndication has become more popular than securitization as there is interest rate risk in holding the transaction for too long. Most buyers now have an abundant supply of capital that needs to be deployed, and companies such as Finance Exchange make it easier for buyers and sellers to exchange information in a more secure environment.
That said, credit parameters are much more stringent than they were before the Great Recession. And the way syndicated deals have been processed hasn’t changed much over time, still relying on a primarily paper-based process using email and spreadsheets. Although Finance Exchange has recently launched a syndication platform to replace the manual process, we are seeing some resistance in the marketplace, which is typical when new technologies arrive that create efficiency and reduce headcount. But with margins being squeezed on both the buy and sell side, efficiencies become more important than ever for a sustainable market.
By using a syndication platform, unstructured data in disparate files can now be centralized and digitized in a secure environment. Once the data becomes structured, working with it opens up many more possibilities.
This in turn leads to a better understanding of the marketplace, especially for benchmarking purposes through the knowledge of price history. Still, most buyers and sellers in our industry are negotiating based on the deal they last completed as opposed to how the overall market is transacting. Since syndication is such a relationship- oriented business, technology is bettered used to provide more efficiencies so more time can be spent on building relationships and closing deals.
With all these exciting new advancements in our industry, innovation is critical for a healthy marketplace. Those that embrace technology will find themselves at the forefront of the industry for years to come.
Global economic and political changes are affecting equipment leasing and finance markets in diverse geographies. In our interconnected economy, it pays to understand what is happening globally and to look at emerging opportunities.
Patrick Gaskins, Vice President of Financial Services, Corcentric Capital Equipment Solutions
The first step in developing a long-term equipment financing strategy is to identify all of the fixed and variable costs associated with operating your current fleet. Patrick Gaskins of Corcentric recommends developing a spend analysis to identify current and future potential purchases.